QDEAR BOB: We have been investigating refinancing our home loan and have received good faith estimates from several mortgage brokers. But these estimates seem to use some form of "creative financing."

We bought our home about a year ago, with a 20 percent down payment, and it has appreciated about 15 percent in market value since then. We plan to stay here at least five years.

Our current jumbo loan is at 7 percent. One mortgage broker is offering us a 6 percent fixed interest rate with closing costs of about $2,320, plus $8,000 added to the principal balance of our mortgage. Does this make sense to keep the annual percentage rate down?

Also, we've paid our mortgage down about $4,000, but the mortgage broker didn't take this into account although our mortgage has no prepayment penalty. -- Scott R.

ADEAR SCOTT: Consult at least three mortgage lenders before deciding which is the best. Include mortgage brokers, direct lender banks and mortgage bankers. Compare their offerings.

When refinancing, it's best not to pay any loan fees even if you have to pay a one-eighth or one-fourth percentage point higher tax-deductible loan interest rate. The reason is up-front loan costs paid on a refinanced mortgage can only be deducted over the life of your mortgage.

By adding $8,000 in fees to your principal balance, your broker is making your $2,320 out-of-pocket costs seem reasonable. His 6 percent fixed interest rate is very attractive on a jumbo loan. But he accomplished it by adding most of his charges to the principal balance. That's why you need to interview several more lenders to compare their offerings.

Don't worry. At closing, your $4,000 principal reduction will be used to reduce the amount owed on your refinanced mortgage.

DEAR BOB: As an appraiser, I disliked the reader who wrote, "I feel the appraisal process is one huge scam." His big complaint was that the appraiser required him to pay cash, money order or certified check up front before receiving the appraisal.

We appraisers do not like collecting our fee at the door before we even inspect the house. But unless we get our money first, some borrowers will stop payment on their checks if they don't like our appraisals. I've also had some personal checks come back marked "insufficient funds."

You are 100 percent correct in saying, "Appraisals are the weakest link in the home mortgage lending process." I've even had borrowers, unhappy with my appraisals, go to other appraisers who appraised for the amount they wanted to get their loans. That made me look bad with the lender.

Lenders and borrowers pressure us. But we're caught in the middle trying to be honest about a home's market value without losing the lender as a repeat customer. Legally, the lender is our client, not the borrower. But unless we satisfy both lender and borrower, we won't get called back by that lender for more appraisals. -- John H.

DEAR JOHN: Thanks for your honesty about the appraisal process. Homeowners who have inflated ideas about the valuations of their homes can be difficult to please.

However, as a long-time realty investor and homeowner, I've encountered many out-of-area appraisers who didn't know the local home market but took the assignment anyway and came up with unacceptably low appraisals. This is frustrating to borrowers.

Thanks to computers, appraisals are becoming more accurate and less expensive. For example, when I obtained a home equity credit line on my condo in Minnesota, I told the lender I thought my condo was worth about $100,000.

To double-check my ultra-conservative estimate, the lender did a drive-by appraisal (at its expense). Its appraiser, using computerized comparable recent sale prices in the large complex, said my condo was worth at least $145,000. I didn't complain when my credit line was approved for more than I requested.

DEAR BOB: My husband is an only child. About two years ago, his mother was dying of cancer and she insisted on deeding her home to him before she died.

We tried to talk her out of it because we knew from your articles that it is better to inherit than receive a realty gift. But her lawyer went ahead and deeded the house to my husband. She passed away last April.

As the house is about 200 miles away and my husband didn't want to keep it as a rental, he decided to sell. The net sales price, after paying the real estate agent's commission and some other expenses, was $345,000.

However, because it was a gift before she died, my husband's basis was his mother's purchase price of only $35,000 many years ago. The result is a $310,000 capital gain. If she had let my husband inherit the house instead, there wouldn't be any capital gain tax due.

Could he have done anything to stop the gift deed? -- Karen S.

DEAR KAREN: A gift deed can be renounced or refused, but that probably would have caused hostility between your husband and his mother. For some unexplained reason, his mother wanted to be sure your husband received title to her home before she died.

Instead, the best thing she could have done would have been to create a living trust and deed the house into her living trust, making your husband her successor trustee. Then, when she passed on, he could have received title to the house without any probate costs or delays and without any estate tax because it would fall under her $1 million estate tax exemption.

More important, your husband could then sell the house at its new "stepped-up basis" as of the date of her death and owe little or no capital gains tax. Her lawyer should have advised his mother about the benefits of living trusts.

DEAR BOB: We have a property line fence that faces our home. A neighbor painted some graffiti on it. I would like to paint over not just the graffiti but the entire fence so it is attractive. What is the state law on this issue? -- Beverly H.

DEAR BEVERLY: If the fence is on the property line, it is called a "division fence," which is jointly owned by the two neighbors. As far as I am aware, no state has any law that prohibits a homeowner from painting the side of the jointly owned fence facing his house.

Who is going to complain? If the neighbor objects, you have no liability unless the neighbor can prove damages.

DEAR BOB: One rule for refinancing a home loan is to wait until interest rates drop at least 2 percentage points. That rule probably applies to a 30-year mortgage. But does the same rule apply to my 15-year mortgage? -- Pat K.

DEAR PAT: Forget that old 2 percent rule. Whether you have a 30- or 15-year mortgage, there are no longer any rules to determine when it's time to refinance. Some homeowners I know refinance once or twice a year, whenever interest rates drop and they can obtain a new no- or low-cost mortgage that reduces their monthly mortgage payment.

DEAR BOB: Several weeks ago you answered a question about reverse mortgages for senior citizen homeowners like me. I live on a federal pension of just $19,000 a year but have about $200,000 equity in my home. My mortgage is only $29,000.

I have already spoken with one reverse mortgage lender and read as much as I can stand of the AARP information packet, plus one from Wells Fargo (which holds my mortgage). But the closing costs from the first lender were about $8,667. Is this reasonable? Is there any advantage to sticking with Wells Fargo? -- Steve G.

DEAR STEVE: Wells Fargo is a fine, nationwide reverse mortgage originator. But shop among several reverse mortgage originators. Each lender must give you a written total annual loan cost estimate for your age and home value. It will also state the lender's current interest rate.

This loan origination cost percentage will be very high during the first few years of your reverse mortgage. But the personalized chart will show that the percentage rate will decline gradually the longer you stay in your home. If you don't expect to live in your home at least five years, don't consider a reverse mortgage.

There are only three nationwide reverse mortgage lenders: FHA, Fannie Mae and Financial Freedom Plan. They all offer monthly lifetime payments, lump sum and credit line (except in Texas), or any combination of the three. Each has pros and cons.

DEAR BOB: We wanted to reduce our mortgage interest rate. After reading your articles and learning that up-front loan fees paid on a refinance can only be deducted over the 30-year (or 15-year) mortgage life, we followed your advice to ask for a "no-cost mortgage."

The annual percentage rate from three different lenders was a little more than 6 percent. However, we had to pay for a lender's title insurance policy, appraisal fee and a closing settlement fee for a total of about $1,600. We were on the lookout for last-minute junk fees but couldn't find any other than a recording fee and a FedEx courier charge. Do you think we got ripped off? -- Brian T.

DEAR BRIAN: Probably not. Those out-of-pocket costs you paid to third parties are normal for refinancings. If you were short of cash for closing costs, you could have added them to the loan amount.

If a loan charge is not on the lender's "good faith estimate," which must be provided within three days after submitting a loan application, the fee should not suddenly appear on the closing papers. It sounds as if you did everything right to avoid being victim.

DEAR BOB: We own a 30-year-old townhouse. Recently, we gutted two bathrooms and replaced almost everything -- sink, tub, toilet, floors. Is this considered repair work, or is it a capital improvement that might be tax-deductible when we sell? -- Glenn S.

DEAR GLENN: Home renovation is considered a capital improvement -- but that doesn't make it tax deductible. Instead, save your bills and canceled checks because the total cost of remodeling should be added to your home's cost basis.

For example, suppose you paid $100,000 for the townhouse and you spent $15,000 remodeling its two bathrooms. Your adjusted cost basis is therefore $115,000.

When you sell, subtract your adjusted cost basis from the net or adjusted sales price to arrive at your capital gain.

If the townhouse is your principal residence, and you have owned and lived in it an "aggregate" two of the last five years before its sale, up to $250,000 per qualified owner of the sale profit is tax-free.

DEAR BOB: You are right. Appraisers are the weakest link in the home mortgage lending process. My dad was an appraiser for more than 50 years, so I know appraisals are an art, not a science. But what can I do about a bad appraisal?

My mortgage company said it sent the best appraiser in the vicinity, although he lives and works quite a distance away. I gave him several "comps," including the sales price of the house next door. But his appraisal came in about $50,000 below our purchase price. What can we do now? -- Rosemary F.

DEAR ROSEMARY: Ask your mortgage lender to have the appraisal reviewed. A review appraisal means the lender's review appraiser should recheck the comparable recent home sales prices to determine if they truly are comparable or whether a mistake was made by the first appraiser.

If the lender refuses to cooperate with either a review appraisal or the hiring of another appraiser to do a new appraisal, go to a different lender. There are hundreds of lenders eager for your business, so you are free to switch.

You have no obligation to tell another appraiser about your earlier experience. However, if the second appraisal confirms the result of the first, maybe your home has declined in market value.

DEAR BOB: I understand that to claim a $250,000 principal residence sale tax exemption, the owner must live in the home at least two years. My question is, suppose I only live in my home for one and a half years before selling. Can I receive a reduced tax exemption for $187,500 sale profit? -- Dennis W.

DEAR DENNIS: Maybe. If the reason for the sale of your principal residence before you had lived there 24 months is medical or a job location change that qualifies for the moving expense tax deduction, you can qualify for a partial $250,000 home-sale tax break, based on the number of months you spent in the place.

The IRS recently added seven reasons for selling to the list: death of the homeowner, spouse, co-owner or family member; divorce or legal separation of an owner; job loss qualifying for unemployment compensation; change of employment with insufficient income to pay the mortgage or basic living expenses; multiple births from the same pregnancy; damage to the home by terrorism, war or disaster; and condemnation of the home by a government agency.

Readers with questions should write Robert J. Bruss at P.O. Box 280038, San Francisco, Calif. 94128, or contact him via e-mail at robertjbruss@aol.com.

{copy} 2003, Tribune Media Services Inc.